Tribunal's Decision on AMP Expenditure and Royalty Disputes

The Tribunal partly allowed the appeals, remitting the issues related to AMP expenditure and royalty back to the AO for fresh consideration, while upholding the disallowance of expenses for the liaison office in Sri Lanka. The Tribunal emphasized the need for proper verification and adherence to legal principles in determining the arm's length price and allowable expenses.

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Issues Involved:

1. Set-off of reimbursement of AMP expenditure.
2. Rejection of comparables used by the TPO for determining the Bright Line test.
3. Transfer pricing adjustment on advertisement and sales promotion expenses.
4. Disallowance of royalty.
5. Disallowance of expenses incurred for liaison office in Sri Lanka.

Detailed Analysis:

1. Set-off of Reimbursement of AMP Expenditure:

The Revenue challenged the DRP's decision to allow the set-off of AMP expenditure reimbursed by the AE to the assessee, despite finding that the compensation lacked a sound and scientific basis. The Tribunal noted that the DRP accepted the assessee's contention and directed the TPO to reduce the brand contribution received from AMP expenses while computing the AMP adjustment for the distribution segment.

2. Rejection of Comparables Used by the TPO for Determining the Bright Line Test:

The Revenue argued that the DRP erred in rejecting the comparables used by the TPO for the Bright Line test without merit consideration. The Tribunal observed that the TPO had rejected segmental data due to the lack of supporting documents and vouchers, and the DRP upheld this rejection. The Tribunal directed the TPO to verify the actual working provided by the assessee and delete any double disallowance.

3. Transfer Pricing Adjustment on Advertisement and Sales Promotion Expenses:

The assessee contested the TPO's adjustment of Rs. 14.42 crores on account of excessive AMP expenses. The TPO had applied the Bright Line test, which the Tribunal noted was negated by the Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. The Tribunal remitted the issue back to the AO to follow the principles laid down by the Delhi High Court and determine the arm's length price accordingly. The Tribunal emphasized that the AMP expenses incurred on brands owned by the assessee should be excluded from the total AMP expenditure and that sales-related expenses should also be excluded.

4. Disallowance of Royalty:

The AO disallowed the royalty payment of Rs. 6.28 crores to Diageo North America, questioning its necessity for business purposes. The Tribunal found that the TPO had not made any adjustment to the benchmarking of the royalty transaction. Hence, it was not open to the AO to disallow the expense under Section 37(1) without proper examination. The Tribunal remitted the issue back to the AO for fresh consideration. However, the Tribunal upheld the disallowance of Rs. 5.01 crores pertaining to AY 2009-10, which was claimed on a payment basis under Section 40(a)(ia) in the current year, as it was already disallowed in the previous year.

5. Disallowance of Expenses Incurred for Liaison Office in Sri Lanka:

The AO disallowed the expenses of Rs. 6.69 lakhs incurred for the liaison office in Sri Lanka, as the assessee did not receive any income from Sri Lanka during the relevant year. The DRP upheld this disallowance. The Tribunal agreed with the AO and DRP, noting that no income was earned through the liaison office in the current or previous year, and no details of activities conducted by the liaison office were provided. Therefore, the disallowance was upheld.

Conclusion:

The Tribunal partly allowed the appeals, remitting the issues related to AMP expenditure and royalty back to the AO for fresh consideration, while upholding the disallowance of expenses for the liaison office in Sri Lanka. The Tribunal emphasized the need for proper verification and adherence to legal principles in determining the arm's length price and allowable expenses.

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